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The 2018 tax bill changes have been hailed as favorable by some, shot down as not enough by others, but one thing remains certain: the new law is very confusing for everyone. A number of factors including income and deductions determine just how favorable the law is to certain businesses, especially in the area of pass-through income, where there’s the most amount of debate. Weltman discusses the good, the bad and the ugly about the new changes, as well as how to prepare for taxes any year.
Greg Corombos: Hi, I’m Greg Corombos. Our guest this week is Barbara Weltman. She is an author and speaker, a small business expert, and a longtime tax and business attorney. With the enactment of the Tax Reform Bill at the end of 2017, what do business owners need to know heading into 2018 and beyond? Barbara, thanks so much for being with us.
Barbara Weltman: It’s a pleasure.
GC: We’ll get into some of the specifics in just a moment, and about how this impacts business owners. What’s your overall opinion of this bill? Because if we listen to politicians it’s either the greatest thing ever passed or the start of the apocalypse. What’s the bottom line for small business owners?
BW: The bottom line for small businesses is that’s it’s the most confusing thing I’ve ever seen taxwise. There are some really good things in there; there are some really bad things in there. Overall it’s very difficult to know the totality of the impact on your business.
GC: Let’s start with some of that confusion, and that’s whether deductions in large part have been eliminated for small businesses. One of the things that were promised in this was immediate expensing for businesses. But some are concerned that deductions are largely being eliminated here for small businesses, including the professional services deduction. So, what are the facts?
BW: Let’s separate those two kinds of deductions. We have a brand new deduction for qualified business income--20% of that. And that’s a great write-off for pass-through entities, that they take on their personal returns and effectively lowers the tax on the profits they report from their business. However, once their personal taxable income goes over a certain amount, depending on their filing status, they become subject to limitations. And their different limitations for certain service-type businesses, like accountants and attorneys, and for non-service businesses like retailers and manufacturers. The bottom line for a successful, service-type business, you may not get any deduction.
BW: Yes, but it’s very confusing. We need some guidance from the IRS on how this all going to work out. But you also mentioned write-offs for equipment. And on that front, there are some very favorable changes. For example, one of the write-offs for buying equipment is bonus depreciation, which up until now had only been 50% and only for new property. Under the new law, that goes to 100% for a little while, and that applies to both new and pre-owned property.
GC: You mentioned in passing that the benefits might depend on how you’re filing. So whether you’re an S Corp, a C Corp, LLC, sole proprietorship, obviously there are a lot of different categories that apply here. Who are the winners, and who are the losers?
BW: Well, again it’s hard to tell if you’re a winner or a loser because it depends on your income and your deductions and so many other factors. But for C corporations, there’s now a flat 21% tax rate. Whether you are a little mom-and-pop C corporation with just a modest amount of income or you’re a multinational, you’re paying 21% on your profits.
Compared with owners of pass-through entities as you mentioned, sole proprietorships, limited liability companies, partnerships, S corporations, and independent contractors will pay tax on their personal rates, all of which have been lowered. So the top rate is no longer 39.6%; it’s 37%. And then you have to factor in that additional potential 21% deduction
GC: So a lot to keep in mind there. You mentioned it can be so confusing, and for business owners, some might be right up on the tax code, and some, that might not be their strength. How do they get on top of this?
BW: I think it’s vital to work with a CPA or other tax advisor, and the sooner you sit down and examine your particular situation--your business situation, your personal situation-- then you can devise strategies to take advantage of some changes in the law or make decisions about your form of entity, whether you want to make a change or stay the way you are.
GC: Barbara, did this bill get substantially better for pass-throughs? I remember there were some lawmakers who were holding out, saying there was too much good stuff for the C Corps and not enough for the S Corps and the pass-throughs. Did they ultimately get a better deal here, or marginally?
BW: I think it was certainly better than what was first proposed in the House, which would have been an even more complicated--if you could believe--tax system for pass-throughs than we have now. But again, there are going to be winners and losers in pass-throughs. Some pass-throughs are going to see their taxes lowered, while some may not see dramatic changes.
GC: What would have been smarter? Obviously, that’s a very broad question for a lot of different people with a lot of different factors. What would have made this easier and better?
BW: Well obviously if they didn’t have all the limitations and phase-outs on this 20% deduction; it would have been a real boon for all pass-throughs. So now, it’s only for those who have income below a certain amount that can really take full advantage.
GC: Let’s talk generally now because we’re heading into tax season. Folks getting all their stuff together to file those returns. What’s the smart way to approach the build-up to April 15?
BW: It’s all according to your good record keeping, which hopefully you’ve been doing throughout the year. Hopefully, you’ve been keeping good books and records of all your income and expenses. You’ve kept receipts for all necessary purposes. And you can meet with your tax advisor, your tax return preparer. Most small businesses use a paid professional. The sooner you have that meeting, the sooner you can proceed with tax filing.
GC: What are the common mistakes? I guess sloppy record keeping, booking, would be at the top of the list. What other things do you see on a pretty regular basis that you wish people understood better?
BW: One of the biggest challenges for many small business owners who have pass-through, is the challenge of paying estimated taxes and having the cash on hand to do that. Unless you’re an S corporation with a salary that you have withholding, if you own an unincorporated business, you have to pay estimated taxes in most cases to cover your tax bill for the year. And the first payment comes in April at the same time as your personal return is due. It’s a challenge for businesses who have cash flow issues for owners to come up with the money to pay their taxes. The IRS says that 10 million or more taxpayers have had penalties imposed on them because they’ve underpaid or late paid their estimated taxes.
GC: Barbara, just a minute or so left in our conversation. I know you focus on things besides taxes, although you’re very much an expert on that topic. And I know you’ve written not that long ago about being organized, about having your business priorities in order--this is the time of year folks pay attention to that more than others. What’s your advice for them right now?
BW: It’ easier than ever to stay on top of all that organization and record keeping. There are so many apps you can use today on the fly to, for example, track your car mileage if you use your personal car for business driving. You need to have a good record, and you can put an app on your phone with GPS--it knows where you are, it does your mileage, and you just have to put in some additional information, and you’ve met the recordkeeping requirements, and it’s as easy as can be.
GC: Very good. It’s always nice to have life be a little easier with the help of technology. Hopefully, most business owners are taking advantage of that. Barbara, real quick, if business owners want to get more insights from you, how can they reach you?
BW: You can find me at barbaraweltman.com where you can sign up for my free idea of the day and monthly Big Ideas for Small Business.
GC: Could not be any simpler than that. Barbaraweltman.com. Spelled just like you think it would be. Barbara, again happy new year, and thanks for your great advice today.
BW: Thank you so much.
GC: Barbara Weltman. Author, speaker, small business expert, and longtime tax and business attorney. I’m Greg Corombos.
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